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Ken Kam: Wayne, the trade war with China has led readers to ask whether it would be smart to take money out of the market until it is clear how Trump’s actions are going to play out. Do you think this is a time to invest or take money out of the market?

Wayne Himelsein: I’m personally putting money into the market. Put simply, there is no wrong time to invest. Ever. I know this may sound like a flippant answer, but it’s well substantiated. Let me share all the reasons why.

I’ll start with the math, which by virtue of being mathematical, is irrefutable! I think anyone would agree with me that no person can successfully time bottoms, that is, enter the market at the exact low of every correction over the history of corrections. This is perfection, and clearly impossible. Given this truth, one is stuck waiting for a moment they feel is a “good” time, which we’ve just agreed will not be the bottom, so will either be “on the way down” or “in recovery”.

To estimate the price achieved at the time of investing, we can just scatter, randomly, all the moments of time one might have possibly chosen to invest, and find an average price over varying forward time windows. If we then view the relationship between the time one waits and the average price one pays for the market (the S&P500 index) at each point moving forward, what we find is stunning: the longer one waits, the more they lose by missing the market’s gains while waiting versus how much they’d save buying it cheaper.

While a profound result, the explanation is simple -- the market spends so much more time gaining then it does correcting.

Kam: So you are saying that just by the act of waiting, you are losing more because of the upside you more likely miss over the time you wait?

Himelsein: Yes, exactly, the biggest loss in waiting is missing upside because the market spends so long going up between corrections. You end up paying a higher price even at the perceived “bottom” because of how long time you waited for the correction. Consider that if one bought the exact bottom tick of the recent December 2018 correction, they would still have paid a far higher price for that “bottom” then had they bought the July 2015 “peak” which was followed by not one, but two 10%-ish corrections; one in August 2015 and another in January 2016.

This demonstrates that buying at a perceived peak, then going through two corrections, was still better for an investor then if they had waited for the Dec 2018 “bottom” because of the recovery in 2016 and fantastic gains of 2017. And, again, that assumes they were able to pick the exact bottom in 2018. Anything short of buying the lowest tick was an even greater “loss” then having bought at the July 2015 peak.

Kam: That makes so much sense. I had never really thought about it that way, but in hearing your take, and the mathematical substantiation, I am convinced.

Himelsein: But there’s more. I started out by saying that the mathematics had to be shared first, but following that, I’d like to talk about the psychology of timing, which is the second reason to give up on the dream of buying at the bottom.

Going back to the original problem in timing, one has to wait for a moment they feel is a “good” time (in the unrealistic hope of catching the absolute bottom, which we’ve established is only a perceived good price). As mentioned earlier, our fingers are on the trigger on the way down or else while in a recovery or growth phase; these are all the available regimes we can be in.

The psychological difficulty of “on the way down” is that we get scared, and can’t tell whether we’re at a bottom, so we wait. The mental walls we put up during a recovery is that we don’t know if its a real recovery, “is this just a bounce, or a bear market rally” we say to ourselves, and need to wait to see the turn-around “have legs” whatever that means. And, finally, the hesitation we have during growth spurts is that “the market is too high” or that a downturn is soon coming.

Kam: I know so many of those feelings well, and have actually talked through many of my clients whose words are uncannily those you quote. By the time January recovery “had legs” the market was making new highs!

Himelsein: That’s right, and then at that point, we say to ourselves “oh no, I’ve missed it” and then the inevitable “let me wait for another dip”, and the waiting goes on to miss another big upside leg that can never be caught up to.

The summary point is that our brains are always hesitating, and so we are always waiting. By the math, this means we are, on average, losing out. I say this not to reiterate the math, but to drive home the separate point that our psychology is our greatest enemy, for the mental walls we put up, quite literally, drive up our cost!

Kam: Well said. On the heels of that wisdom, can you tell us more about Keysight Technologies?

Himelsein: Sure thing. Keysight has many of the characteristics of those I’ve talked about before. After going public in late 2014, it had a very difficult time out of the gate, falling throughout the entire year of 2015 until finding its bottom in January of 2016. But from that point forward it has been, in a word, unstoppable.

The recovery was solid, not happening overnight, but taking the entire year of 2016 to reach the early 2015 levels. It looked like a giant “V” with a year-long down and then a year-long up, all to get back to its starting point. But then after breaking out in early 2017, it has just climbed, relentlessly, toward the skies. Its established a powerful trend.

Kam: I know you love those strong trending stocks, and they have served you well. Is there some reason why you like it more right now?

Himelsein: Yes, definitely. After having established itself as the kind of stock I’m interested in, I watched it handle the 2018 correction and January recovery; it was not like the rest of the market that waited till late April to make new highs, it was first. It led the charge in making new highs in January. By later April, it was, in fact, about 40% higher. This was explosive.

But then it took its hit. It stopped abruptly in very late April, said to itself, “phew, that was quite a run”, and fell off a small cliff, giving back a tad over 20%. This was ugly, to say the least. But somewhat expected simply because it went too far too fast, it got ahead of itself. But now it took a step back, and is settling down, calming itself, and re-energizing to continue its climb.

Going back to your question of timing, Keysight is another perfect example where it has just dropped 20%-ish but is still up almost 20% on the year. Had one “waited” during its January climb, they’d still be paying higher after its drop. So, while we cannot wait for “dips” because we miss out on gains, when we do get dips, when they are handed to us on a silver platter, on the stocks we like for broader reasons, we must use that gift horse to grab them.

My Take: The best time to buy stocks is when they are down for reasons that have little to do with the company, and this is one of those times. But don't make a big purchase of a single stock and don't wait for a more perfect time to invest. Make small investments in a portfolio of stocks that you won't need to disturb for at least 5 years.

It's better to make small buys rather than waiting until you think the market has reached the bottom before making a big purchase. If your brokerage firm charges a lot to make small trades, take a look at FOLIOfn, a brokerage firm I use for clients for precisely this reason, and in which I have no other economic interest.

Wayne’s Logica Focus Fund (LFF) has an 18+ year track record at Marketocracy. Over that period, Wayne averaged 11.67% a year which compares well to the S&P 500's 5.76% return for the same period.

If you would like to know when Wayne updates his views, click here. To be notified when I write about specific stocks my managers cover click here.

I am the CEO and founder of Marketocracy, Inc.,and portfolio manager at Marketocracy Capital Management, LLC. My firm maintains a database of the world’s greatest

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I am the CEO and founder of Marketocracy, Inc.,and portfolio manager at Marketocracy Capital Management, LLC. My firm maintains a database of the world’s greatest “unknown” investors. I require these “Marketocracy Masters” to outperform the S&P 500 for a minimum of 5 years before their model portfolios are used in our clients’ separately managed accounts.